EUR USD (1.3000) Yesterday morning the euro started the day with clear indications that negotiations on Greek PSI are heading for an impasse. During the day it shrugged off the official confirmation about the Greek stalemate and continued firming up. A FT report yesterday played up the possibility of Germany agreeing to increase its contribution to the pan-European rescue vehicles. Although the news was later denied by a spokesperson, it failed to create significant headwinds for the euro. It seems that on the back of yesterday’s equity rally, the euro investors also tried to reap profits from a respite in bad news originating from the eurozone. In the aftermath of S&P mass downgrade, there is increasing realisation that, at least in the short-term, all the bad news is out. In addition, the ECB’s three-year LTRO has created a buffer for banks’ liquidity issues and has perhaps reduced the probability of a negative event. In this environment, the reports that the US money markets funds are increasing their exposure to the short-dated French and Spanish bonds, might be representative of the thinking of real-money investors. So, a reversal of capital outflows from euro may be underway. We suspect the record short euro-positions on the IMM could be a red-herring; the euro is now attracting some new long and medium-term investors, not just speculators covering shorts. As a result of the recent stabilisation, we believe the euro will climb 1.3285 (with a first stop at 1.3085). The risk-limit to the bullish strategy is now set slightly higher at 1.2850.
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Deutsche Bank